Concept: borrowing to buy property raises your return only while the property earns more than the loan costs. This calculator finds the exact point where leverage stops helping, shows how much it magnifies a bad year, and sets the highest loan-to-value (LTV) ratio your loss limit allows.
What This Resource Does
This calculator converts a mortgage decision into numbers you can plan around:
- Unlevered and levered return on your equity
- Break-even property return, below which borrowing hurts
- Break-even price growth, given the property's income yield and the loan rate
- Break-even loan rate for a given return
- Stress-year return at each LTV
- Equity wipe-out point, the fall in value that removes all your equity
- Maximum LTV for the loss you can tolerate in a bad year
It uses the NOI and cap rate from the Net-Yield Comparison Estimator and the same stress logic as the Rate-Shock Stress Test. The loan here is interest-only, which keeps the leverage arithmetic clean. Principal repayment builds your equity rather than costing you money, so a repayment loan changes cash flow but not the core result.
Inputs You Need
| Input | Where to find it |
|---|---|
| Purchase price or current value | Valuation, comparable sales |
| NOI before mortgage payments | Net-Yield Comparison Estimator |
| Expected annual price growth | Your own conservative assumption |
| Loan amount and interest rate | Lender quote |
| Stress-year price growth | A past worst year for your market, or harsher |
| Maximum equity loss you can tolerate in one year | Your own honest limit |
| Lender's minimum DSCR | Loan terms, lender term sheet |
| Buying and selling costs | Solicitor or agent quotes |
The Formulas
Step 1: Unlevered return
Ru = Cap rate + Price growth
Cap rate = NOI ÷ Value
Step 2: Levered return on equity
D = Debt, E = Equity, V = D + E
Levered return = Ru + (Ru − i) × D ÷ E
where i is the mortgage rate. The second term is the leverage effect. It is positive when Ru exceeds i and negative when it doesn't.
Step 3: Break-even property return
Break-even Ru = i
Below that, every extra dollar borrowed lowers your return.
Step 4: Break-even price growth
Break-even growth = Mortgage rate − Cap rate
Above this growth rate, leverage raises your return. Below it, leverage lowers it.
Step 5: Growth at which your levered return is zero
Growth for zero return = i × LTV − Cap rate
Step 6: Equity wipe-out point
Fall in value that removes all equity ≈ 1 − LTV
This ignores income received along the way and selling costs, so the real figure is slightly worse.
Step 7: Cash yield and coverage
Cash-on-cash = (NOI − Interest) ÷ Equity
Interest-only DSCR = NOI ÷ Interest
Cash-on-cash exceeds the cap rate only if the cap rate exceeds the loan rate.
Step 8: Maximum LTV for a stress-year limit
Rs = Cap rate + Stress growth
Maximum D ÷ E = (Rs + Loss limit) ÷ (i − Rs)
Maximum LTV = (D ÷ E) ÷ (1 + D ÷ E)
Enter the loss limit as a positive number. This applies when Rs is below i.
Worked Example
Illustrative figures. Buying costs and tax are ignored.
| Assumption | Value |
|---|---|
| Property value | $500,000 |
| NOI | $27,500 (cap rate 5.5%) |
| Expected price growth | 3.0% |
| Loan | $350,000 interest-only (70% LTV) at 6.0% |
| Equity | $150,000 |
| Stress-year growth | −3.0% |
| Equity loss limit in a bad year | 5% |
| Lender minimum DSCR | 1.20 |
Steps 1 and 2: Unlevered and Levered Return
| Line | Working | Result |
|---|---|---|
| Unlevered return (Ru) | 5.5% + 3.0% | 8.5% |
| Debt-to-equity | $350,000 ÷ $150,000 | 2.33 |
| Leverage effect | (8.5% − 6.0%) × 2.33 | +5.83 pts |
| Levered return | 8.5% + 5.83% | 14.33% |
Check in dollars: income $27,500 + growth $15,000 − interest $21,000 = $21,500, which is 14.33% of $150,000.
Steps 3 and 4: Break-Even Points
| Line | Working | Result |
|---|---|---|
| Break-even property return | equals the loan rate | 6.0% |
| Break-even price growth | 6.0% − 5.5% | 0.5% a year |
| Growth for a zero levered return | 6.0% × 70% − 5.5% | −1.3% a year |
If prices grow faster than 0.5% a year, borrowing helps. If they fall by more than 1.3% a year, you lose money on equity, even though the property is still producing income.
Return at Different Growth Rates (70% LTV)
| Price growth | Unlevered return | Levered return | Dollar result on $150,000 equity |
|---|---|---|---|
| +3.0% | 8.5% | 14.33% | +$21,500 |
| +0.5% (break-even) | 6.0% | 6.00% | +$9,000 |
| 0% | 5.5% | 4.33% | +$6,500 |
| −3.0% | 2.5% | −5.67% | −$8,500 |
| −10.0% | −4.5% | −29.00% | −$43,500 |
Leverage helps most when you least need it and hurts when it matters. A 10% fall in value costs about 29% of your equity.
Break-Even Loan Rate (growth of 3%)
Break-even rate = Ru = 8.5%
| Loan rate | Levered return | Working |
|---|---|---|
| 6% | 14.33% | as above |
| 7% | 12.00% | ($42,500 − $24,500) ÷ $150,000 |
| 8.5% | 8.50% | ties with unlevered |
| 10% | 5.00% | ($42,500 − $35,000) ÷ $150,000 |
This is a growth-dependent break-even. With 3% price growth the loan stops helping at 8.5%, but with flat prices it stops helping at 5.5%.
Step 6: Equity Wipe-Out Point
Fall in value that removes all equity ≈ 1 − 70% = 30%
| Fall in value | Loss in dollars | Equity lost |
|---|---|---|
| 10% | $50,000 | 33% |
| 15% | $75,000 | 50% |
| 30% | $150,000 | 100% |
Step 7: Cash Yield and Coverage
| Line | Working | Result |
|---|---|---|
| Interest | $350,000 × 6.0% | $21,000 |
| Cash flow | $27,500 − $21,000 | $6,500 |
| Cash-on-cash | $6,500 ÷ $150,000 | 4.33% |
| Interest-only DSCR | $27,500 ÷ $21,000 | 1.31 |
The cap rate is 5.5% and the loan costs 6.0%, so this is negative cash leverage. Cash-on-cash (4.33%) is lower than the unlevered yield (5.5%). All of the leverage benefit in the 14.33% comes from expected price growth, not income.
Four LTV Levels Compared
| LTV | Debt / equity | Levered return at +3% growth | Levered return at −3% growth | Interest-only DSCR |
|---|---|---|---|---|
| 0% | 0 | 8.50% | 2.50% | n/a |
| 50% | 1.00 | 11.00% | −1.00% | 1.83 |
| 70% | 2.33 | 14.33% | −5.67% | 1.31 |
| 80% | 4.00 | 18.50% | −11.50% | 1.15 |
At 80% LTV the DSCR of 1.15 falls below the lender's 1.20 floor, so a lender would not size the loan that high at this rate.
Step 8: Maximum LTV for a 5% Stress-Year Limit
Rs = 5.5% − 3.0% = 2.5%
Maximum D ÷ E = (2.5% + 5%) ÷ (6.0% − 2.5%) = 7.5 ÷ 3.5 = 2.14
Maximum LTV = 2.14 ÷ 3.14 = 68.2%
At 70% LTV, the stress-year return of −5.67% breaches a 5% limit. Check at 68.2%: debt $341,000, equity $159,000. Interest $20,460, so the stress-year result is $27,500 − $15,000 − $20,460 = −$7,960, or −5.0% of equity.
Verdict
- Break-even: leverage helps if prices grow faster than 0.5% a year, and the levered return turns negative if prices fall faster than 1.3% a year.
- Expected case: at 3% growth, the 70% LTV loan lifts return from 8.5% to 14.33%.
- Bad year: a 3% fall costs 5.67% of equity, against a gain of 2.5% unlevered. A 10% fall costs 29%.
- Cash flow: the cash yield (4.33%) is below the cap rate (5.5%), so all the benefit relies on growth.
- Cap: under a 5% bad-year loss limit, borrow no more than about 68% of the value.
How to Read It
- Leverage multiplies the gap, not the return. The gain or loss on your equity is the spread between property return and loan rate, scaled by D ÷ E.
- A positive spread depends on growth. If the cap rate is below the loan rate, income alone dilutes your return and growth has to do the work.
- Break-even growth is a low bar. The loss limit is the real constraint. Borrowing pays in most years and hurts badly in a few.
- Amortisation lowers risk over time. Repaying principal raises equity and cuts D ÷ E, so a repayment loan is safer than interest-only, though payments are higher.
- Rate resets move the break-even. Use the Rate-Shock Stress Test to see where a higher rate pushes the break-even growth.
- Costs shift everything. Buying costs add to your equity and selling costs reduce proceeds, so rerun with them for a realistic hold period.
- Tax can change the picture. Interest deductibility, depreciation, and capital gains rules differ widely, so rerun the numbers after tax.
- Lenders may limit you before your own rule does. The DSCR floor can cap the loan below your LTV limit.
Step-by-Step Method
- Gather the value, NOI, loan rate, and your growth assumption.
- Calculate the cap rate and unlevered return (Step 1).
- Calculate the levered return (Step 2).
- Find the break-even growth and the growth for a zero return (Steps 4 and 5).
- Build a growth table from strongly positive to a severe fall.
- Calculate the equity wipe-out point (Step 6).
- Calculate cash-on-cash and DSCR (Step 7).
- Compare several LTV levels in both the expected and stress cases.
- Set your loss limit and calculate the maximum LTV (Step 8).
- Choose an LTV at or below the lowest of your limit, the lender's limit, and a level where the DSCR holds.
Leverage Worksheet (Copy This)
| Line | Item | Your figure |
|---|---|---|
| A | Property value / NOI | |
| B | Cap rate (NOI ÷ value) | |
| C | Expected price growth | |
| D | Unlevered return (B + C) | |
| E | Loan amount / interest rate, i | |
| F | Equity / D ÷ E | |
| G | Levered return (D + (D − i) × F) | |
| H | Break-even growth (i − B) | |
| I | Growth for a zero levered return (i × LTV − B) | |
| J | Equity wipe-out fall (1 − LTV) | |
| K | Interest / cash flow (NOI − interest) | |
| L | Cash-on-cash / interest-only DSCR | |
| M | Stress-year growth / stress return | |
| N | My equity loss limit | |
| O | Maximum LTV from Step 8 | |
| P | Lender's maximum LTV and DSCR-based loan | |
| Q | Chosen LTV and review date |
LTV Comparison Table
| LTV | Debt / equity | Return at expected growth | Return at stress growth | DSCR | Within my limit? |
|---|---|---|---|---|---|
| Yes / No |
Leverage Checklist (Copy This)
| # | Check | Done |
|---|---|---|
| 1 | Used NOI after realistic vacancy and costs | ☐ |
| 2 | Compared the cap rate with the loan rate | ☐ |
| 3 | Found the break-even growth rate | ☐ |
| 4 | Tested a stress year that is at least as bad as the worst in my market | ☐ |
| 5 | Calculated the equity wipe-out point | ☐ |
| 6 | Set an equity loss limit before choosing the loan | ☐ |
| 7 | Calculated the maximum LTV from my limit | ☐ |
| 8 | Checked DSCR against the lender's minimum | ☐ |
| 9 | Included buying and selling costs | ☐ |
| 10 | Rerun the numbers after tax | ☐ |
| 11 | Checked what happens at the rate reset (Rate-Shock Stress Test) | ☐ |
| 12 | Held a cash reserve for vacancy and repairs | ☐ |
| 13 | Wrote down my chosen LTV and a review date | ☐ |
Common Mistakes This Calculator Catches
- Treating leverage as free return. It magnifies losses by the same factor as gains.
- Relying on growth to justify the loan. When the cap rate is below the loan rate, the case rests on prices rising.
- Looking only at the expected case. A bad year is what tests the loan.
- Using the purchase price for LTV after values fall. Lenders use current value, and your LTV rises as the price drops.
- Ignoring the DSCR floor. The lender's coverage test may limit you well below your own LTV cap.
- Forgetting that income cushions only part of the fall. A 30% price fall wipes out equity even if rent is paid on time.
- Comparing return on equity with return on the whole property. They are different measures, so compare like with like.
- Skipping costs. Buying costs raise equity and selling costs reduce proceeds, which lowers returns on short holds.
- Borrowing the maximum because the lender allows it. The lender's limit protects the lender, and your limit protects you.
Important Note
Loan terms, interest deductibility, depreciation, capital gains treatment, and lender lending rules differ by country and lender, and they change over time. The rates, growth figures, and costs above are illustrative, not forecasts, and the example assumes an interest-only loan, a single year, and no tax or transaction costs. This is a framework for sizing a loan, not personal investment advice. Readers should consider their own circumstances and consult a qualified financial adviser or mortgage professional.
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